first majestic silver

Macmin (AU:MMN)

June 18, 2005

Disclosure: This analysis has been done by way of a validation exercise of this analyst's personal investment in MMN. It has used a "back of the envelope style" approach and, admittedly, could have been done more accurately to 5 decimal places. Nevertheless, it is reasoned that the end result would probably not be significantly different.


The long term chart of Macmin (courtesy: is reflecting the same indecision as that being reflected on the silver price chart. There is a bullish argument and a bearish argument.


  • Price below 40 week MA
  • Declining tops shows declining intermediate term trend


  • Sideways price movement has caused declining trend to be penetrated
  • Long term uptrend line still intact
  • Angle of decline of tops is steeper than that of bottoms - giving rise to a falling wedge
  • OBV is strong

The intermediate direction of the silver price chart is still effectively unresolved - with the long term up trend line still intact, and the intermediate term characterized by a triangle formation that could just as easily break down as up. If it breaks up, the long term up trend will remain intact. However, if it breaks down, the long term uptrend line will also break down.

The latest Commitment of Traders report as at June 7; source: ( shows that 78% of bullish open interest is speculative, and 78% of bearish open interest is Commercial (as opposed to speculative). Once again, the market makers are happily accommodating the market participant's predisposition to want to "punt".

The market makers have typically made money this way but, of course, the day will inevitably dawn when the stopped clock is right, and the market makers will lose their shirts.

It's at times like this that fundamental analysis becomes important.

The following is reproduced from a slide in a recent "road show" given by the company:

We can use this information to derive a Net Present Value per share based on forecast pre tax cash flows. However, to do this we need to take a view on cash that will be applied to capital expenditure.

The following information was extracted from the company's annual accounts

If we take the information from the slide above, and apply "conservative" assumptions regarding price of silver and cost of production, we arrive at a Net Present Value per share in US Dollars of $0.063 (A$0.081), as follows:

Importantly, we have used a discount factor of 22%, being 5 X the "risk free" US long bond rate of 4.4%.

The following is a 5% x 3 box reversal Point and figure chart of the silver price (courtesy, which shows that - if a break up in the silver price were to occur, the price target would be $8.75/oz based on horizontal count technique, and $10.02 per ounce based on the vertical count technique

If we make some more optimistic assumptions regarding the silver price, eg, $8.75/oz in the short term based on the horizontal count measured move, and $10/oz in the long term, based on a vertical count technique, then we get a Net Present Value per share of US$0.088 and A$0.113

Of course, this is particularly interesting given that the closing price of MMN on Friday June 17th was A$0.115 per share.

Well, maybe this is just a coincidence, but I am inclined to think that it is not. All the information is "visible"

So, the above tells me the following:

  1. The market believes that the silver price will continue along its long term bull trend
  2. The market has factored most visible information into account and has arrived at an actual share price that is very similar to the theoretical price. i.e. The market is acting "rationally"

But there are some even more interesting background facts that this argument has ignored, as follows:

  1. Macmin has investments in New Guinea Gold, and Malachite resources
  2. Macmin has "resources" of 50 million ounces of silver, whereas the above spreadsheets show that only 33 million ounces will be mined
  3. Continuing exploration activity by the company is anticipated by the Directors (no validation but years of experience) to yield total resources of around 100 million ounces.

For the sake of argument, let's factor the value of NGG into the equation, and also let's assume that production from years 4-9 rises from 4mm ounces to (say) 6mm ounces per year. Here's what we get - a NPV per share of US$0.133 and $A0.17

Alternatively, going back to our original assumption of $7.50/oz and $10/oz, we get a NPV of US$0.108 and $A0.139


Based on relevant visible information, Macmin's current share seems to be fairly valued to yield a pre tax return on capital invested of 22% p.a. over the long term.

Given this analyst's view that the silver price - in the next 5 years or so - will continue to rise; and that the value of NGG will also rise as the gold price rises, it seems reasonable to conclude that Macmin represents an above average long term investment that might have some exciting upside potential in the event that the silver price spikes upwards.

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